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Mexico: VoIP Becoming A Hot Market

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Mexico Industry: Internet Telephony Becoming A Hot Market

October 11, 2004

By Staff

As Internet telephony begins to revolutionise the Mexican telecommunications sector, it is uncertain which firms will benefit, and how. Domestic cable-TV companies are eager to exploit their broadband capabilities by offering voice, video and data services, but want to do so alone, not in mandatory alliance with local telecommunications companies, as the government has proposed.

Meanwhile, such savvy foreign Internet entrepreneurs as US-based Vonage and Dialpad Communications are already exploiting pent-up demand for flexible and low-cost Internet telephony services.

Commonly known as Voice over Internet (VoIP) telephony, the technology offers significant savings to consumers. Voip telephone calls, made via the Internet, cost a mere 2-4 cents per minute to the US or Europe, compared with average rates of 50 cents per minute via a traditional telephone line. Nor do the benefits stop there: Voip is continuing the erase price distinctions between domestic local and long-distance calls.

Moreover, innovations such as Vonage's recent launch of Mexico-City-based telephone numbers enable its clients anywhere in the world to use a local Mexican number to make and receive calls. Notwithstanding VoIP's appeal to users, challenges remain, particularly as VoIP's mobility and versatility are inviting protectionist efforts to thwart its use inside the country.

A case for cable

Once Mexico approved "fast-track regulations" last year permitting cable firms to offer Internet and data services, the next logical step was telephony. According to the Camara Nacional de la Industria por Television por Cable (Canitec), the local cable-TV association, much of the US$200m invested each year by the industry is earmarked for upgrading the 76,000- km network with the necessary broadband capabilities to offer these triple services.

Mexico's Secretariat of Communications and Transport (SCT), however, has proposed that cable firms offer telephony in conjunction with a local telecommunications entity. According to a cable executive, "the SCT plan is a payback for when Mexico opened up the telecommunications sector and many new firms, such as Avantel and Alestra, did not prosper as expected. So now, the government wants us to give them our network. The telecommunications firms get the business and we get a pittance as a commission."

Francisco Rivero, research director at Banco Santander adds: "Some cable firms have been investing for years to pipe broadband services through their networks. And now, when they are poised to reap the returns, the SCT's proposal would yield them marginal benefits from having to rent their networks rather than offer the service directly."

Yet a move to allow cable firms to offer telephony on their own has its own challenges. For starters, cable firms' push into telephony will be matched by demands from telecommunications firms, namely dominant carrier Telefonos de Mexico (Telmex), that they be allowed to offer video. Were Telmex to offer video, few companies would be able to compete as triple service providers against this monopoly.

Moreover, the sector as a whole has exhibited little propensity to innovate. With less than 3m users, most cable firms have hardly developed the market's potential. Adds Mr Rivero, "Many regional cable firms have become complacent with a captive market, failing to improve or innovate their services. Why should the government give them VoIP? Will Voip really make a difference in making them more competitive?"

Dialpad doesn't need broadband

Indecision in Mexico over how to best exploit local broadband networks may result in lost market opportunities for many firms. Moreover, VoIP's versatility does not even require a broadband Internet connection.

Dialpad Communications, founded in 1999, is one firm that offers Voip with a simple dial-up connection. Says Vincent Paquet, director of marketing and business development at Dialpad: "The quality of a broadband connection for Voip is undoubtedly superior to a dial-up connection. However, many Dialpad users in Latin America -- which represent a major percentage of Dialpad's 14m clients -- do not have access to broadband. Indeed, Mexico's broadband market is nascent, with a mere 500,000 subscribers, or 0.5% of the population, while Internet users with dial-up connections number approximately 12m.

With Dialpad, potential customers take a few minutes to download the required software ( Once it is installed, users can either use a cheap pair of headsets or have Dialpad ship a special phone designed for Voip to begin making calls. Services are offered under a variety of prepaid and subscription plans, the latter starting with packages of 300 minutes for US$7.50 a month or 500 minutes for US$10.00.

Currently, Dialpad only provides outbound service for long-distance and international calls. As of December, however, customers will be able to obtain a US telephone number with which they will be able to both make and receive calls. Whether they live in Mexico City or Sao Paolo, this US telephone number will ring in their homes or businesses. Clients or relatives living in the US can use these numbers to contact relatives leaving miles away yet the call will be considered local.

A Mexico City number in Kansas

Use of Voip for both outbound and inbound service -- to make and receive calls -- is set to further blur the lines between local and long-distance telephony. Vonage, a Voip phone provider established in 2001, already offers clients the option of having "virtual" phone numbers with US and Canadian area codes and, as of mid-September, Mexico-City based numbers. Vonage obtained the Mexico City numbers via a joint venture with a local Mexican telecommunications firm, whereby the latter sold Vonage approximately 5,000 Mexico City numbers. For an additional cost of US$4.99 to existing packages (which range from US$14.99 to US$49 per month) -- Vonage customers can now use a Mexico City number to stay connected to business associates, friends and family.

Luis Holder, executive vice-president of product development at Vonage, cites several reasons why Vonage clients began asking for Mexican numbers. As an example, a Mexican living in Kansas can now have a local Mexico City number to which friends and relatives may call. Although the phone rings in a home in Kansas, it is still a local call for the relative calling from Mexico.

Moreover, Vonage clients -- which number around 275,000 -- can transport and use their service anywhere in the world, thanks to the technology's portability. The Vonage system works with a portable box that can be connected to any broadband connection, ideally 90k. For instance, a businessman from North America can go to the UK, take his Vonage box -- and virtual phone number with an area code from anywhere in Canada, the US and Mexico City, depending on his preferences -- and plug it into a broadband connection. Colleagues, family and friends can reach him in the UK but be charged for only a local call.

Vonage's tactic of offering the portable box for free will further enhance the technology's dissemination and acceptability. The box may be obtained either directly from Vonage at no cost or for US$30 from distributors such as Best Buy, Radio Shack, Circuit City, Staples, and Office Depot. Customers buying from distributors are offered Vonage rebate programmes to cover 100% of the box's cost. There is one glitch for clients outside the US and Canada: at present the boxes may only be shipped to Canadian and US addresses. Mexico-based users, for instance, must purchase the box while on a trip north.

Regulating Voip

Shipping constraints are not the only constraint Voip providers face as they expand globally. Regulatory issues represent a major hurdle. For many providers, regulatory challenges are not new, as they have dealt with US agencies regarding VoIP's ability to provide emergency services as well as to seek clarity over whether federal or state authorities have jurisdiction over Internet telephony.

Yet the challenges may be even tougher in other countries, where Voip risks becoming subject to arbitrary and costly suspensions. For example, both Panama and Grenada have randomly suspended Voip services by deliberately blocking the "ports", or the Internet entry point for Voip services. Says Mr Paquet: "When you suddenly have over 20 customers from Grenada calling you saying that their service does not work, you know something happened." In the absence of any clear regulatory framework for VoIP, arbitrary interruptions present a risk. In Mexico, some cable firms might even disrupt Voip services, should they not be given the green light to offer the services themselves.

Vonage downplays the risk of suspensions, claiming its unique technology uses a multi-port system that is difficult to block. Nonetheless, the issue is not fanciful. On the one hand, the telecommunications sector in many countries still represents an important source of government revenue. And even where the sector has been privatised, authorities are under pressure to protect local companies that invest in infrastructure and represent a major source of employment. Governments may be hard pressed to simply displace current systems with newer and more flexible Voip services, particularly when the latter do not bring the same amount of investment and employment to the country.

On the other hand, consumers -- particularly in Latin American countries such as Mexico -- are in dire need of lower-cost telephony. Plus, having a more competitive telecommunications sector enhances a country's standing within the global economy. Either way, what is needed is a clear regulatory roadmap so that Voip can be accessible to all, consumers and companies alike. Otherwise, local communications firms might be left behind as the technology draws away their customers, while consumers might suffer arbitrary service suspensions by embittered local firms.

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†AK and HI residents pay $29.95 shipping. ††Limited time offer. Valid for residents of the United States (&DC), 18 years or older, who open new accounts. Offer good while supplies last and only on new account activations. One kit per account/household. Offer cannot be combined with any other discounts, promotions or plans and is not applicable to past purchases. Good while supplies last. Allow up to 2 weeks for shipping. Other restrictions may apply.

1Unlimited calling and other services for all residential plans are based on normal residential, personal, non-commercial use. A combination of factors is used to determine abnormal use, including but not limited to: the number of unique numbers called, calls forwarded, minutes used and other factors. Subject to our Reasonable Use Policy and Terms of Service.

2Shipping and activation fees waived with 1-year agreement. An Early Termination Fee (with periodic pro-rated reductions) applies if service is terminated before the end of the first 12 months. Additional restrictions may apply. See Terms of Service for details.

HIGH SPEED INTERNET REQUIRED. †VALID FOR NEW LINES ONLY. RATES EXCLUDE INTERNET SERVICE, SURCHARGES, FEES AND TAXES. DEVICE MAY BE REFURBISHED. If you subscribe to plans with monthly minutes allotments, all call minutes placed from both from your home and registered ExtensionsTM phones will count toward your monthly minutes allotment. ExtensionsTM calls made from mobiles use airtime and may incur surcharges, depending on your mobile plan. Alarms, TTY and other systems may not be compatible. Vonage 911 service operates differently than traditional 911. See for details.

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